Case scenario:
Clark and Shiffer LLP perform activities related to e-commerce consulting and information systems in Vancouver, British Columbia. The firm, which bills $140 per hour for services performed, is in a very tight local labor market and is having difficulty finding quality help for its overworked professional staff. The cost per hour for professional staff time is $50. Selected information follows.
- Billable hours to clients for the year totaled 6,000, consisting of: information systems services,
3,600; e-commerce consulting, 2,400.
- Administrative cost of $381,760 was (and continues to be) allocated to both services based on billable hours. These costs consist of staff support, $207,000; in-house computing, $145,000; and miscellaneous office charges, $29,760.
A recent analysis of staff support costs found a correlation with the number of clients served. Inhouse computing and miscellaneous office charges varied directly with the number of computer hours logged and number of client transactions, respectively.
A tabulation revealed the following data:
E-Commerce
Consulting
Information
Systems
Services Total
Number of clients .......................................................................... 60 240 300
Number of computer hours ............................................................ 2,100 2,900 5,000
Number of client transactions ......................................................... 720 480 1,200
Required:
Question 1: Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained.
Question 2: Assume that the firm uses traditional costing procedures, allocating total costs on the basis of billable hours. Determine the profitability of the firm's e-commerce and information systems activities, expressing your answer both in dollars and as a percentage of activity revenue.
Question 3. Repeat requirement (2), using activity-based costing.